Strong February, yet currency headwinds persist


Fund Commentary
13 Mar 2015


February was a strong month for US equity markets, with the S&P 500 Index quickly reversing its January disappointment and reaching new historical highs. During the month, the Fund returned +7.6% and outperformed the index by 2.1%.

The global macroeconomic stage was initially dominated by negotiations between Greece and the European Union. While markets have become better at looking through the self-made, tactical drama prescribed by negotiation strategy, the potential for miscalculations always remains a source of unease and gave way to a quick relief rally following the temporary accord. Although these developments did not directly affect the US, it did strengthen Mr. Draghi’s case for a decisive QE in Europe. In turn, this contributes to further momentum in the weakening of the Euro against the Dollar, a relevant factor for US markets and companies’ earnings going forward.  

In the US, Mrs. Yellen’s appearance in front of the congress proved rather benign. Once again, after acknowledging the economy’s progress, she stressed the data dependent nature of the Fed’s policy decisions and her intention of altering forward guidance before considering a rate hike. Notably, her characterisation of the international macroeconomic picture was balanced and did not suggest a recent change in the Fed’s views.

The month of February also saw the US earnings season near its close, with currency fluctuations and uncertainty around oil prices continuing to dominate the conversation. The former particularly weighed on results and outlooks for S&P 500 companies, many of which derive a significant share of their profits from overseas. With a natural tendency towards higher quality, consumer-facing companies with substantial domestic exposures, the Fund’s holdings performed particularly well on the back of strong results and resilient growth outlooks. This month, significant contributors included Valeant, Avago, Cognizant, Disney and Amerco, following strong earnings, outlooks and business developments. All told, February was a positive month for fundamental investors as questions around the macro outlook and perceptions of tightening financial conditions led to an increasing differentiation among stocks, generally favouring quality non-cyclical growth stocks. Following some performance-led portfolio rebalancing and divestments (Express Scripts, Anheuser-Busch, Norfolk Southern), the Fund decreased its net exposure on the last days of the month. This additional dry powder is expected to be put to use as perceptions of an upcoming tightening, exacerbated by foreign exchange headwinds, create intermittent volatility. The Investment Adviser remains convinced of the existing portfolio’s significant potential and remains as ever focused on high quality growth companies trading at undemanding valuations.

The views and statements contained herein are those of Banque Eric Sturdza in their capacity as Investment Advisers to the Fund as of 12/03/15 and are based on internal research and modelling.